Fuel Hedging by Southwest Airlines
Southwest Airlines Fuel Hedging and Relations to Profitability
Abstract
In order to stay airborne, a passenger airline has to consistently generate profits. Profits come only from paying passengers, hence all stratagems must be customer oriented. In a scenario where there are many airlines competing with each other, one way of attracting passengers is to keep the cost of flying low, while providing value for money. On the other hand, expenses must tightly controlled to reach and stay at the lowest possible. Certain expenses are unavoidable; however, one variable that can be kept low through decisive planning and foresight is the cost of fuel, which, at best, can be called volatile. A good way to achieve this is by hedging fuel cost, which is a complex, but rewarding process, as this Case Study of Southwest Airlines proves beyond doubt.
Southwest Airlines Company: A Case Study in Managing the Cost of Aviation Fuel
Southwest Airlines Company, an American low-cost airline is the third largest airline in the world as well as the U.S.A. by the number of passenger aircraft among all of the world 's commercial airlines (Arlene Fleming, About.com Guide; www.nationsonline.org), operating more than 540 Boeing 737 aircraft today between 67 cities in the U.S.A. (Southwest Airlines Fact Sheet of 2008). Today, Southwest operates approximately 3,300 flights daily and boasts of being the only major airline to post profits every year for the last thirty six years. It justifiably claims to be the United States’ most successful low-fare, high frequency, point-to-point carrier (www.southwest.com).
Given the fact that it is a no-frills airline, it is still streets ahead of other low-cost carriers the world over and, in an atmosphere darkened by virtually global recession− where almost every airline is cutting back on staff, leased aircraft, number of sorties per day and skipping low or loss-making sectors− the fact that it has been rarely gone into the
Abstract
In order to stay airborne, a passenger airline has to consistently generate profits. Profits come only from paying passengers, hence all stratagems must be customer oriented. In a scenario where there are many airlines competing with each other, one way of attracting passengers is to keep the cost of flying low, while providing value for money. On the other hand, expenses must tightly controlled to reach and stay at the lowest possible. Certain expenses are unavoidable; however, one variable that can be kept low through decisive planning and foresight is the cost of fuel, which, at best, can be called volatile. A good way to achieve this is by hedging fuel cost, which is a complex, but rewarding process, as this Case Study of Southwest Airlines proves beyond doubt.
Southwest Airlines Company: A Case Study in Managing the Cost of Aviation Fuel
Southwest Airlines Company, an American low-cost airline is the third largest airline in the world as well as the U.S.A. by the number of passenger aircraft among all of the world 's commercial airlines (Arlene Fleming, About.com Guide; www.nationsonline.org), operating more than 540 Boeing 737 aircraft today between 67 cities in the U.S.A. (Southwest Airlines Fact Sheet of 2008). Today, Southwest operates approximately 3,300 flights daily and boasts of being the only major airline to post profits every year for the last thirty six years. It justifiably claims to be the United States’ most successful low-fare, high frequency, point-to-point carrier (www.southwest.com).
Given the fact that it is a no-frills airline, it is still streets ahead of other low-cost carriers the world over and, in an atmosphere darkened by virtually global recession− where almost every airline is cutting back on staff, leased aircraft, number of sorties per day and skipping low or loss-making sectors− the fact that it has been rarely gone into the
References: Cited Corley.M., Hedging Fuel Prices, Rock Products, 2008, accessed on 25 November 2009. Cobbs.R & Wolf.A., Company SEC filings and Carter et al. (2002), Finance 467, Spring 2004; accessed on 25 November 2009. Presentation by Southwest, Dallas, U.S.A., 2003, http:// www.southwest.com, accessed on 25 November 2009. UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Washington, D.C. 20549 http://www.sec.gov/edgar.shtml, accessed on 25 November 2009.